Foreign Competition and Innovation

Elhanan Helpman

No 31840, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Empirical studies have found that enhanced foreign competition can encourage or discourage innovation. To address this relationship, I examine a market structure in which a small number of large multi-product oligopolists compete with a large number of small single-product firms in the same industry. The single-product firms are short-lived while the multi-product firms live forever, and the large firms invest in innovation in order to enlarge their product spans. All firms export. I show that an increase in the competitiveness of foreign firms can increase or reduce innovation efforts of a large multi-product firm. Moreover, changes in the incentives to innovate can be different for more-productive and less-productive oligopolists. As a result, aggregate sectoral innovation may rise or decline, depending on the productivity distribution of the oligopolists. I also show that changes in short-term operating profits may not be aligned with changes in the incentives to invest in innovation.

JEL-codes: D43 F1 L1 (search for similar items in EconPapers)
Date: 2023-11
New Economics Papers: this item is included in nep-bec, nep-com, nep-gth, nep-ind, nep-int, nep-mic and nep-tid
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